If you’re heading for the Big Five-Oh and don’t have any retirement savings, you might be worried. The good news is that it’s not too late to fix this situation before you retire. Today, I want to walk you through three simple steps I’d take to save £1m by the time you reach retirement age.
#1: Forget the Cash ISA
It’s tempting to think you should play safe and put your savings in a Cash ISA. Unfortunately, this isn’t likely to work. With top Cash ISA rates sitting around 1%, the value of your money won’t even keep pace with inflation.
I think it’s essential to have a cash emergency fund saved before you start investing. But, after that, I think the best place for your long-term savings is the stock market.
Based on the government’s current rules, if you’re 50 today, your official retirement age will be 67. You won’t be able to receive your State Pension until then. That means you’ve potentially got another 17 years to work and save for retirement. This should give you plenty of time to benefit from the long-term growth potential of the stock market.
#2: Where I’d invest my cash
Over the last 20 years, the FTSE 250 index of mid-sized companies has risen by 170%. Over the same period, the FTSE 100 has — unbelievably — fallen by 3%.
Although the FTSE 100 has provided more income than the FTSE 250 during this time, these bigger dividends haven’t been enough to compensate for the FTSE 250’s stronger growth.
The great thing about the FTSE 250 is that most of the companies in the index are well-established and profitable. They aren’t too risky, but they are still small enough to continue growing.
If I was targeting a £1m retirement fund starting at 50, I’d probably put 50% of my savings into a FTSE 250 index fund. I’d use the other half of my cash to invest in a handpicked selection of FTSE 100 stocks.
There are some really good businesses in the FTSE 100 which have massively outperformed the market over the last 20 years. For example, Unilever shares have risen by 320% since October 2000. The consumer goods firm’s dividend hasn’t been cut for more than 50 years either.
Over time, a selection of stocks like Unilever should boost the income available from your FTSE 250 tracker and deliver additional growth.
#3: Monthly savings needed to build £1m
It’s impossible to predict the value of an investment in 17 years’ time. But I can give you a rough idea of what should be possible.
Over the last century, the average annual return from the UK stock market (including dividends) has been around 8%. Based on this rate of return, you’ll need to save £2,316 each month until 2037 to build retirement savings of £1m.
If you can boost your returns to 10% — which I think could be possible — then you’d need to save £1,879 to hit £1m by your 2037 retirement date.
Even if you can’t save this much, I think it’s still worth investing. For example, saving £250 per month until 2037 could give you a £108k fund when you retire. That could make a big difference to your lifestyle.
Above all, what matters is that you start today. Tracker fund investments are available for as little as £25 per month. Start now, and build up what you can — you won’t regret it.
